Hornbach Baumarkt, a DIY chain, knows all about raising a roof. So when the company decided last year that its growth was being capped by limited credit, it took a step unfamiliar to most of its peers in the Mittelstand, Germanyâs mid-cap market. It obtained a credit rating and launched its first corporate bond, raising â¬250m ($290m) with 10-year notes.

The move marked out Hornbach as an exception among Mittelstand companies. Germany’s big investment banks are betting that plenty of other mid-caps will follow its lead.

The Mittelstand is a loose concept, generally denoting mid-sized enterprises, often family owned, and typically with revenues between €250m and €2.5bn. They contribute the bulk of Germany’s GDP, employ most of its workforce and are considered the engine of the economy. Mittelstand firms have traditionally resisted capital market products, not least because they would mean opening their accounts to wider scrutiny.

Like most German mid-caps, Hornbach, a listed company with annual revenues of €2.1bn, was heavily reliant on bank loans. But it found that borrowing was no longer the cosy affair it used to be. Müller said: “Banks’ lending conditions have become tough. This is an important issue for the Mittelstand.”

Banks are tightening credit terms under the pressure of the Basel II regulations governing their capital. The result could be an opportunity for investment banks. Stefan Schott, spokesman for Initiativ Finanzstandort Deutschland, a lobby group representing large banks and insurers, said: “The interest of the Mittelstand in structured finance must grow. It is starting to happen but Mittelstand companies do not trust these financial instruments.”

Scenting an opportunity, Germany’s big banks have reorganised to target the Mittelstand. Dresdner’s announcement this month that it would merge its London-based investment bank Dresdner Kleinwort Wasserstein with its domestic corporate bank, is the clearest indication to date that the Mittelstand is becoming a bigger priority. Last year, the bank created a team of structured finance specialists to focus on Mittelstand customers.

Like Dresdner, Deutsche Bank last year created a division to target the Mittelstand, headed by Jürgen Fitschen. Commerzbank, traditionally strong in the mid-cap market, has also reorganised to sharpen its focus. Last year it split its corporate bank into three divisions, one of which is the Mittelstand Bank.

The growing presence of private equity firms in Germany is another reason for investment banks to boost their presence in the Mittelstand. Volumes of leveraged loans used to finance buy-outs have hit record levels. There has also been a trickle of initial public offerings from mid-cap companies.

None of this impresses the publicly owned savings banks, the Sparkassen, which, with the Landesbanken, the regional publicly owned wholesale banks, claim to have a 43.2% share of the Mittelstand market. A spokesman for the Sparkassen’s industry body, the DSGV, said: “They should just try it,” referring to the big, privately owned banks’ campaign to gain market share.

“They abandoned this market a few years ago in favour of investment banking and they fell on their noses. Now they have discovered that they need customers. They need distribution channels for this market; our strength is that we are everywhere and we know our clients.”

Mid-cap companies that raise funds externally tend to stick to tried-and-tested sources and methods, according to the DSGV. Its figures show that of the €1bn in Mittelstand finance deals recorded last year, about 89% were in the form of traditional bank loans with the rest divided between leasing, factoring, private equity and share flotation deals.The data show there is no credit crunch in Germany, according to the DSGV spokesman. “Bank credit remains the dominant form of Mittelstand finance and it is likely to stay that way.”

But the financing options for mid-cap companies are expanding rapidly. Particularly popular are mezzanine finance arrangements, which mix characteristics of equity and debt. Financial providers are also offering various forms of asset securitisation; equipment-leasing arrangements; factoring deals; and syndicated loans.

Matthias Hellstern, a senior analyst at Moody’s credit rating agency, said among the financing tools gaining ground were private placements, in which US institutional investors provide Mittelstand companies with five to 15-year loans on favourable terms. “These are somewhere between loans and bonds. Companies like them because there is not a lot of restrictive language included. Banks like them, too, because they do not have to use their own capital.”

Securitisation is also gaining ground. One example is preferred pooled shares, a product marketed by the HVB Group and Capital Efficiency Group, a Swiss consultancy. With preferred pooled shares, the bank packages 30 to 60 mezzanine loans into a special-purpose vehicle, which refinances itself by issuing bonds.

Deutsche Bank, Commerzbank and Dresdner Bank are pursuing the Mittelstand market with structured finance products. Deutsche Bank launched a mezzanine finance product, EquiNotes, in March, since when it has raised nearly €400m, said a spokesman. He added that sales to the Mittelstand of derivatives, insurance products and loans linked to currency options were also growing fast.

Commerzbank last year launched MezzCAP, a structured finance product and another based on promissory notes. Initial results have been promising, said Martin Fischedick, Commerzbank’s regional board member for corporate customers in northwest Germany.

He said the bank’s target was to add 9,000 customers by the end of next year and 8,300 were there. He added that the promissory notes product had reached a volume of €250m.

Many of these do not require the level of transparency demanded in public markets, giving Mittelstand companies some comfort. But they will not be able to cling to their privacy for ever.